Smart Contract Security Risks in DeFi Protocols: Assessing Long-Term Viability Post-Hack

The decentralized finance (DeFi) sector has long grappled with security vulnerabilities, but 2025 marked a pivotal year for both the scale of attacks and the resilience-or fragility-of projects in their aftermath. As DeFi protocols continue to attract billions in total value locked (TVL), the stakes for robust security have never been higher. This analysis examines the 2025 hack landscape, focusing on five major incidents-Bybit, Cetus Protocol, Balancer v2, Phemex, and Nobitex-to evaluate their post-hack recovery trajectories and the broader implications for the long-term viability of DeFi projects.

The 2025 Hack Landscape: A Dual Threat

The year 2025 saw a surge in both on-chain and off-chain security breaches. Off-chain vulnerabilities, such as compromised private keys and supply chain attacks, dominated headlines. The Bybit hack in February, for instance, exploited a third-party signing infrastructure to drain $1.4 billion in 23 minutes, with the Lazarus Group identified as the perpetrator. Meanwhile, on-chain flaws-particularly mathematical errors in smart contracts-remained a persistent risk. Cetus Protocol's $223 million loss in May stemmed from an integer overflow vulnerability, while Balancer v2's $128 million exploit in November was attributed to a rounding error in stable pool logic.

These incidents underscore a critical duality in DeFi security: while smart contract audits and formal verification tools have improved, off-chain risks-often overlooked-continue to expose systemic weaknesses. As stated by a report from Hacken, "Operational security failures, such as compromised access controls and phishing attacks, accounted for 58% of all losses in 2025."

Post-Hack Recovery: A Tale of Two Responses

The ability of DeFi projects to recover post-hack hinges on three factors: financial solvency, operational continuity, and user trust. Bybit's response to its February 2025 breach exemplifies a proactive approach. The exchange restored reserves within 72 hours, processed over 350,000 withdrawal requests in the first 12 hours, and implemented 50 security upgrades, including the Lazarus Bounty program. By December 2025, Bybit had not only retained its position as the second-largest crypto exchange by trading volume but also expanded its user base to 80 million.

In contrast, Cetus Protocol's recovery was less successful. Despite halting trading and patching its contracts, the project faced significant net losses. A July 2025 report by Nominis noted that 68% of DeFi hack events led to spikes in trading volume, reflecting heightened market uncertainty. Cetus's governance token price plummeted by 14% post-attack, aligning with broader trends where 55% of DeFi crime events caused similar declines.

Balancer v2, however, demonstrated a middle-ground approach. The protocol recovered a portion of affected funds and distributed them to impacted users, while urging liquidity providers to exit at-risk pools. This mitigation strategy, though imperfect, preserved some user confidence and allowed the project to retain its market position.

The Cost of Erosion: User Trust and Market Volatility

User trust remains the most fragile asset in DeFi. A ScienceDirect study highlighted that DeFi projects experienced an estimated $1.3 billion in indirect losses from reduced market capitalization of DAOs between 2020 and 2022. In 2025, this trend intensified. Phemex's January hack-resulting in $85 million stolen via compromised private keys-led to a 20% drop in its native token's value, despite the exchange's pledge to cover user balances. Similarly, Nobitex's politically motivated attack in June, which exposed its source code and drained $80–90 million, eroded trust in its regional operations, with cold wallets remaining secure but hot wallet vulnerabilities persisting.

Lessons for Long-Term Viability

The 2025 hacks reveal a critical lesson: long-term viability in DeFi requires a holistic security strategy. Projects like Venus Protocol showcased progress, detecting a $3 million exploit 18 hours before execution via Hexagate's monitoring tools and freezing funds through governance. This proactive detection and response capability-absent in earlier hacks-suggests that adaptive defenses are maturing.

However, the concentration of losses in Q1 and early Q2 2025 (with Bybit's hack alone accounting for 44% of annual losses) indicates that many projects still lack robust contingency plans. For investors, this underscores the importance of evaluating not just technical audits but also operational risk management, third-party vendor oversight, and transparency in post-hack communication.

Conclusion: A Call for Comprehensive Security

As DeFi evolves, so too must its security paradigms. The 2025 incidents highlight that while on-chain vulnerabilities are increasingly detectable, off-chain risks-such as supply chain attacks and key management flaws-remain under-addressed. Projects that integrate both on-chain and off-chain safeguards, as Bybit and Balancer v2 have done, are more likely to retain user trust and market share.

For investors, the path forward lies in prioritizing projects with transparent recovery mechanisms, proactive security upgrades, and a demonstrated ability to adapt post-crisis. In an ecosystem where trust is paramount, the ability to recover-not just survive-will define the long-term viability of DeFi protocols.